Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt. Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms. Firm U Firm L Assets €20,000 €20,000 Equity €20,000 €10,000 EBIT € 3,000 € 3,000 INT (12%) ? ? EBT ? ? Taxes (40%) ? ? NI € ? € ?

Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt. Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms. Firm U Firm L Assets €20,000 €20,000 Equity €20,000 €10,000 EBIT € 3,000 € 3,000 INT (12%) ? ? EBT ? ? Taxes (40%) ? ? NI € ? € ?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 3MC

See similar textbooks

Similar questions

Consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses €10,000 of 12 percent debt. Both firms have €20,000 in assets, a 40 percent tax rate, and an expected EBIT of €3,000. Construct partial income statements, which start with EBIT, for the two firms. Answers: Firm U Firm L Assets €20,000 €20,000 Equity €20,000 €10,000 EBIT € 3,000 € 3,000 INT (12%) -------- -------- EBT Taxes (40%) --------- --------- NI €-------- €---------
You are analysing NBM firm and obtained the following information: FCFF reported as R198 million, interest expense is R15 million. If the tax rate is 35% and the net debt of the firm increased by R20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%? R1,950 billion R2,497 billion R2,585 billion R3,098 billion R 1,893 billion
Bulldogs Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P500,000; its fixed assets are P200,000; debt and equity are each 50% of total assets. EBIT is P40,000, the interest rate on the firm’s debt is 10%, and the firm’s tax rate is 25%. Current assets will be 10% of sales with a restricted policy. Under a relaxed policy, current assets will be 20% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies? 5.40% 3.57% 4.00% 3.20%
Choose a,b,c,d,e for the following: Question 3 - Firm U has an EBIT of $10 million and is 100% equity-financed while Firm L, which also has an EBIT of $10 million, uses $100,000 as debt in its capital structure. The interest rate is 6% p.a. and both firms are subject to a 25% tax rate. Based on this information, which of the following is true? a. The value of Firm L is the same as the value of Firm U. b. The tax paid by Firm L is $2,500,000. c. The value of Firm L exceeds the value of Firm U by $1,500. d. Firm U pays lesser tax than Firm L. e. The cash flow from L is $7,501,500.
Firms A and B are identical except for their capital structure: A is fully equity financed, while B carries £50m of debt on which it pays 5% interest. Both firms are projected to generate annual cash flows of £10m in perpetuity. A's cost of capital is 10%. Assume perfect capital markets and no taxes. In the absence of arbitrage opportunities, what is the value of firm B's equity and its cost of equity capital? £100m and 10% £50m and 15% £150m and 10% £100m and 5%
Perseverance Corporation is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total P3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is P150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. What's the difference in the projected ROES under the restricted and relaxed policies? [Round off to one decimal place.)
please answer questions 1 and 2 all parts and show working and formulas where necessary. Thanks in advance. 1. Tesla has $50m in assets, which is financed with 40% debt and 60% equity. The company's beta is currently 1.25 and its tax rate is 30%. Using the Hamada equation, find Tesla's unlevered beta. 2 Firms HD and L.D each has $30m in invested capital, $8m of EBIT, a tax rate of 25%. Firm HD has a D/E ratio of 50% with an interest rate of 8% on their debt. Firm D has a debt-to capital ratio of 30%, however, pays 9% interest on their debt. Calculate the following:a. Retum on invested capital for each firmb. Return on equity for each firmc. If HD's CFO is thinking of lowering the D/E from 50% to 40%, which will lower their interest rate further from 8% to 7%, calculate the new ROE for HD.
Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent. REQUIREMENTS: 1. What is the annual interest payment? 2. What is the annual dividend payment? 3. What is the required income before interest and taxes to satisfy the dividend requirement??
Lux Co. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are P400,000; its fixed assets are P150,000; debt and equity are each 50 percent of total assets. EBIT is P36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
Vimal Enterprises is considering a shipping project for which it proposes to employ a debt-equity ratio of 2:1. Its pre-tax cost of debt will be 12 percent and its expected tax rate is 30 percent. There are three firms, Aay, Bee, and Cee engaged wholly in shipping. Their tax rate is 35 percent. Their equity betas and debt-equity ratios are as follows: Firm Equity Beta Debt-Equity Ratio Aay 1.4 2 Bee 1.2 1.8 Cee 1.1 1.5 (a) What is the average asset beta of the three firms Aay, Bee, and Cee? (b) What is the beta of the equity for the shipping project of Vimal Enterprises ?
Give typing answer with explanation and conclusion SeattleHealth Plans currently uses zero-debt financing. Its operating profit is $1 million, and it pays taxes at a 23 percent rate. It has $8 million in assets and, because it is all-equity financed, $8 million in equity. Suppose the firm is considering replacing 22 percent of its equity financing with debt financing that bears an interest rate of 5 percent. What impact would the new capital structure have on the firm's profit?
Walsall Albion Co. currently has a debt-to-equity ratio of 0.35 and a total market value of €200 million. the company believes that increasing leverage (by taking on debt and repurchasing an equal euro amount of shares) will increase firm value; consequently, they have set a target debt-to-equity ratio of 0.6, which they plan to maintain permanently. If the marginal tax rate is 30%, then present value of the tax shield it will create?